U.S. tax cuts may cheat death, but reform needs life

The Bush tax cuts look on the verge of cheating death. The White House is strongly hinting it will compromise with Republicans and agree to temporarily extend wealthy and middle-class tax reductions set to vanish at year-end. That would provide welcome relief since even partial expiration risks sapping economic growth during a flaccid recovery. But a two-year deal, while welcome, would also still leave the long-term state of the tax code in flux. Washington should use the extra time for sweeping reform.

The tax cuts enacted by George W. Bush became an important talking point for the midterm campaigns. Besides the national GOP victories, liberal Washington state provided a glimpse into how the country seems to be thinking about the issue. Voters there overwhelmingly rejected a measure that would have raised income taxes on the richest 1 percent to pay for education and health spending.

Higher taxes remain politically toxic in the slow-growth, high unemployment U.S. economy. That’s one reason why White House press secretary Robert Gibbs said his boss is willing to haggle. President Obama already was on board with permanently extending middle-class cuts costing $2.9 trillion over a decade. He now also seems ready to accept a brief extension of cuts for the rich that will add to the tab.

The deal is likely to be a combined two-year extension. Republicans reckon their 2012 negotiating position would be stronger by keeping both sets of cuts on the same schedule since the high-end ones are less popular. But the timing also ensures the hot-button matter will get new life during the presidential election season.

The only potential silver lining to this unpleasant sausage-making is that it provides a window for a long overdue discussion about a longer-term fix. America needs a more stable and simpler tax system to become more competitive.

Obama’s deficit panel may offer some suggestions next month, but the basics seem basic enough. Taxes should be lower, broadly applied and subject to as few market-distorting deductions and loopholes as possible. As Indiana Governor Mitch Daniels often quips, America needs a tax system that looks like someone designed it on purpose.

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James Pethokoukis is the Money & Politics columnist for Reuters Breakingviews. Previously, he was the business editor and economics columnist for U.S. News & World Report. Pethokoukis has written for many publications including The New York Times, The Weekly Standard, Commentary, USA Today, and Investor's Business Daily. Pethokoukis is also an official CNBC contributor. In addition, he has appeared numerous times on MSNBC, Fox News Channel, Fox Business Network, The McLaughlin Group, CNN, and Nightly Business Report on PBS. A graduate of Northwestern University and the Medill School of Journalism, Pethokoukis is a 2002 Jeopardy! champion. james.pethokoukis@thomsonreuters.com